The Shield & Sword – Investments that can play offense & defense

As frequent visitors to this site will know, lately I have been touching on the idea of selecting companies to invest in that have both value and growth characteristics. This is a strategy that I not only preach, but also practice. While scouring the Internet for new investing ideas, an analogy came to me that accurately depicts this strategy – a shield and a sword.

As an investor, you want your portfolio to grow; you seek chart patterns with lines cutting upwards to new heights. Yet, though your quest is for new stock price heights, you realize that the environment is not always a dreamland where prosperity flourishes. Therefore, you also want an investment that has some form of defense mechanism that helps protect itself against a market that stumbles and falls backwards.

A number of investment ideas can provide you with both components. One area where I see a number of investments that are positioned to be offensive in growth and defensive in risk is with emerging market companies that provide basic services. As an investor you are betting on emerging market growth, while relying on the defensive nature of the company’s service(s) to reduce volatility (risk).

Latin America is filled with a number of emerging markets, which by their nature have a population growing at a fast pace. As these markets ‘emerge,’ a greater number of its occupants will seek more services we in the ‘West’ regard as basic. If you hold this assumption to be true, then I would take a look at some basic utility providers found in the Latin countries south of the U.S. border.

Companhia de Saneamento Basico (SBS) – This company is Brazil’s largest water utility. Water treatment and distribution are a pivotal component of any developed economy. As a country’s economy develops and more wealth is created, clean water and wastewater disposal will become one of the first services demanded by those ‘moving up the ladder.’

SBS has 197 water treatment facilities, 438 sewage treatment facilities and about 25 million customers. The current PE ratio is 5.8x.

CPFL Energia SA (CPL) – A Brazilian power company with a hefty dividend. As of today, the dividend stands at 6.81%. CPL distributes and generates electricity to approximately 6.6 million customers (about a 13% market share). The company is also involved in ‘green’ power generation with the construction of a hydroelectric, two biomass, thermoelectric and wind farm facilities. As Brazil grows the demand for electricity will grow. Growth with a heavy dividend…It’s what I’m looking for.

Banco Bradesco S.A. (BBD) – When people start to get money what do they then need? A place to hold their money. Banking on banking in Brazil is what BBD is all about. This company is in the top 10 most profitable companies and is one of the largest private-sector banks in Brazil.

Remember, this is a small sample…It’s a starting point. Don’t forget that foreign stocks bring currency risk with them. It’s something to consider.

Where is your hometown? Do you know what company owns the wind farms that are located there? It might be an interesting investment. Sometimes when you’re in the thick of an industry you can understand current conditions or future events better than others on the ‘outside.’